How To Avoid The fixed Rate Home Loans Traps
Fixed rate home loans rise and fall in popularity as market conditions change. As variable interest rates start to rise most consumers seek the comfort of a fixed rate to immunise themselves against increasing loan repayments.
Whilst fixed rates will always have a place in the home loan market there can be a sting in the tail if you do not do your homework. Let’s look at some of the facts about fixed-rate home loans so you can decide whether they will suit your circumstances or not.
Fixed rate home loans become a mini contract within your overall home loan agreement. This means that when you choose a 1, 2, 3, 4, or 5 or more fixed rate term, you are making a commitment with the bank to keep the loan for the duration of that period.
If you wish to sell your home all refinance your loan to another lender, you will have to pay out the fixed rate home loan. The lender is entitled to charge you for breaking your contract and you will have to pay whatever the bank calculates as its loss. For example if your fixed rate is set at 6% and the variable rate on the day you pay your loan out is 4%, you are likely to be paying a hefty figure. On the other hand if the variable rate was, for example 8%, the penalty would be minimal or maybe even zero.
How To Pay Off Your Debt Faster Using Your Home Loan
Many borrowers neglect to consider the option of using their home loan to consolidate debt. It is quite common that in the years following a home loan approval, borrowers will take out personal loans and credit cards for a variety of reasons. It is also quite common that some years down the track they attempt to consolidate their debt through a personal loan.
Whilst this strategy can be effective in deserving cash flow and making it more manageable by having everything in one loan, it is worthwhile looking at using a home loan to achieve the same purpose.
Let’s take an example. A couple with a mortgage of $350,000 over 30 years at an interest rate of 6.5% will be making monthly repayments of $2212. Let’s assume they have a personal loan for $10,000 over five years at 12% requiring a monthly repayment of $222; another personal loan of $15,000 over five years at 11% requiring a monthly repayment of $326 and a credit card maxed out at $7000 requiring a monthly repayment of $210.
This makes their total monthly commitments $2970, with the non-home loan repayments totalling $758. So, if they can consolidate their total debt of $32,000 into a personal loan that costs less than $758 per month, they will be in front.
Finding the right home for you
If you asked a random individual on the street to list their long term goals, you would find that, nine times out of ten, they will place owning a home on that list.
Everybody wants to own a home, but the reality is that we don’t want to own just any home, rather, we want to own the home that’s just right for our needs and our lifestyle.
But, what, exactly, does that mean? The truth is that the definition of the perfect home is different for every individual. It has to do with your lifestyle, your short term and long term goals, your budget, your career, and, yes, your personal preferences.
Before setting out to find your perfect home, your first priority should be to determine what you’re looking for in the first place, so that you will know it when you see it. In other words, don’t start house-shopping until you have a plan of action and know that you can reasonably cover the payments on a mortgage for that ideal home.
The home loan application process
The first thing that you absolutely need to know about the process of applying for a home loan is this: Do not be intimidated.
For many first time home owners, it can be a little imposing walking into a loan agency and asking for a mortgage. Just bear in mind that these lenders and agencies would not be in business in the first place if they did not want your business. Right now, lenders are competing with one another to offer lower prices and better service to their borrowers, agencies are trying to find the best deal possible in order to secure more customers, and real estate is becoming something of a buyer’s market.
In other words, the ball is in your court, so to speak, so don’t assume that you’re backed into a corner, or that you will have to accept the first deal that’s offered to you. Try to get the best mortgage deal you can find.
In fact, it may be a good idea to address a few of the common worries here:
Do you need a realty broker?
One of the questions that comes up quite often with new home buyers is that of whether or not it’s worth the effort to find and enlist a realty broker. Before we can answer that question, we should first examine what it is, exactly, that a realty broker does.
For clarification, “realty broker” is the job title used in the United States and Canada. Various countries and territories have their own term for these professionals. In the United Kingdom, for example, a realty broker would be called an estate agent. Other titles include real estate agent and estate broker, but in any event and in any state or territory, a realty broker’s duties to their clients amount to roughly the same list of objectives.
In essence, a real estate broker’s job is to find his or her client the property they’re after, to arrange a deal with the property owners, to share their knowledge of the realty market with their clients, and to ensure that all involved parties are happy with the arrangements.
The primary difference between an agent and a salesperson is that a realty agent works for the buyer, while a salesperson works for the seller. It may not seem like much of a difference, but a salesperson’s job is to sell the home to the buyer, whether it is exactly what the buyer wants or not. An agent’s job is to find the home buyer the best home at the best price.
Are you ready to be a homeowner?
There is certainly no doubt that everybody wants to own a home. To not have to pay rent, to have some equity, and, hopefully, to have something that actually builds value over time, perhaps providing you with a sufficient fund for when you reach retirement. Perhaps most importantly, however, is that it is a home that you own.
Home ownership is a dream for most people, there is no doubt about that. Today, that dream is more accessible to more people than it has typically been in the past. However, not everybody is ready to own a home.
There are a lot of things to consider before taking that first step towards home ownership. Buying a home can be a great experience, but it is always a large responsibility, so you really need to stop and consider whether or not it’s a responsibility that you’re willing to take on right now.
In an effort to help you reach that decision carefully, we’ll provide you with a simple checklist for the potential new home owner. Consider these to be some basic questions to ask yourself:
Arranging a Smart Home Payment Plan
Arranging a smart home payment plan can be a tedious, stressful and confusing task, but in truth, it really shouldn’t be. It only comes down to understanding your options and selecting the best of them.
We will break it down into a number of simple steps, starting with the preliminaries…
1) Shop for a Home that is within your Means
This applies only if you have not yet bought your home, of course.
The most important thing is to be realistic and to not try to live beyond your means. The mortgage and banking crises we’ve been experiencing these last 12 months largely come down to foreclosures as a result of people being approved for loans that they were not able to pay back. Simply put, buy a home that you can afford, and make sure you’re ready to be a homeowner before making the commitment.
2) Make a Budget and stick to it
This step applies if you are living on a fixed income: Calculate your income and expenses. Set a budget for everything from food to clothing to the gas you put in your car, and do not go a dollar over so far as you can help it. If this means switching to generic brands, so be it. Every dollar counts. Write out shopping lists and estimate the total costs, rounding up as you go. The same goes with all other expenses. Know what you’re spending, cut what isn’t necessary, and keep as much money in your pocket as you can.
3) Make a Checklist
10 tips to securing a home loan
We’ve only got about one page to list these 10 tips for securing a home loan, so let’s jump right into it!
1) Get your credit score up
This is the key rule. Do not even think about getting a home loan until you’ve paid off your debts and worked your credit score up.
2) Get your credit score up
Seriously! What you should do is settle all your old debts, and then cut up all of your credit cards, but one or two. Use those for simple things like buying gas or grocery shopping and then pay them off on time.
3) Live within your means
Credit cards gave birth to a generation of people buying more than they could afford, with many of them winding up hundreds of thousands of dollars in debt as a result. Your spending money should be cash only.
4) Make sure the time is right
Getting a low interest rate on your home loan
It really is everyone’s dream to be a homeowner. More than simply having a house to live in, we want to own our homes outright…to owe money to nobody. Unfortunately, what gets a lot of us is the interest rate. We manage to pay off the value of our home, but now we’ve got a whopping ten percent interest, or more, to pay off.
That’s how banks make their money. When you think about it, all a bank does is take money from one person and loan it to another. The people who loan their money to the bank (this is what investment accounts are all about) earn a small amount of interest on the deal. The people who borrow from the bank pay a large enough interest to cover the investment account holder’s interest, and to keep the bank running and to make sure it makes a profit out of the transaction.
Whether you go with a bank or a private company, you want to keep your interest rate low, and this really comes down to one thing above all else: keeping a great credit score.
There’s a simple trick to doing this.
Different types of home loans
We list below a brief explanation of each of the more common types of home loans available to home owners and home buyers. Before you go to one of the sites like wikianswers or Yahoo! Answers (and sorting through a dozen spam comments) give this page a quick look as most likely you’ll find your answers here.
Mortgages
There are a dozen different types of mortgages, but in the interest of simplicity, we’ll just explain the basic idea behind a mortgage which is that you take out a loan using the home you intend to buy as collateral against the loan. If you fail to make payments, the lender will ultimately have the right to your home and can foreclose or sell it. Mortgages do come with interest rates, like any other loan.
Subprime Lending
Subprime lending refers to a lender providing credit to borrowers who don’t yet meet prime underwriting guidelines. Subprime borrows have a higher perceived risk. This lending is applied to people with a history of delinquency or defaulting, those with bad credit, or those simply with limited debt experience (eg students).
